Tuesday, 28 June 2016

Indian e-commerce cart hits a plateau

Behind numerous
headlines of a cash crunch hit ting major Indian ecommerce companies, and
commerce companies, and their valuations being questioned, is a revelation not
too many people are talking about. Indian e-commerce was emblematic of frenetic
growth until very recently , but the last six to eight months have seen the
industry come to a grinding halt, making it an inflection point for all the
players involved.

TOI accessed and
analysed data for top e-tailers, which revealed that the online retail market
stagnated between May 2015 and 2016 in terms of the value of goods sold. While
in May last year, the e-commerce biggies clocked a gross merchandise value, or
GMV , run rate of $9 billion, that number has only inched up to about $10
billion at the end of May this year, translating into an 11% annual growth. In
December last year, the total GMV run rate had reached $10.5 billion on the
back of the festive season, which typically sees a rush of discounting from all
e-tailers.

GMV is overall sales on
an online marketplace, excluding discounts and returns which are an integral
part of the e-commerce market.

The data gleaned from
primary research and vetted by multiple stakeholders in the industry indicated
that Flipkart, the country's largest online retail player, has seen its GMV run
rate stall at about $4 billion for almost a year, while an aggressive Amazon
has gone from clocking $1 billion to $2.7 billion in gross sales. However,
Amazon's operations in India only began three years ago and it's been gaining
ground on a smaller base.What's worth noting is that Flipkart notched up a 400%
growth the year before, when it's GMV zoomed from $1 billion to $4 billion,
post which the numbers have gone flat.Gurgaon-based Snapdeal, on the other
hand, has seen an almost 50% knock-down in sales numbers after similar highs it
touched exactly a year ago. The company said as of June, its GMV run rate was
more than $2.5 billion.

An email sent to Flipkart's
spokesperson did not elicit a response till the time of going to press. In an
earlier interaction with TOI, Amit Agarwal, Amazon's India head, had said the
online retailer hadn't witnessed any signs of a slowdown and, instead, had
grown shipments impressively at 150% in the first quarter of the calendar year.

E-commerce companies
earn anywhere between 5% and 15% in commission from sellers, which makes up
their revenue. GMV had been the key metric for all e-tai lers in India to show
rapid growth and ratchet up their valuations in multi-billiondollar fund-raises
over the past two years. But with sales staying flat or declining, most
e-commerce players are now starting to focus on returning customers, which
their founders keep stressing in media interactions.GMV run rate varied from
month to month and is pretty jagged, depending on promotions and discounts that
are available at the time. But the data collated by TOI points to a palpable
slowdown for the first time after a heady period of growth.

Reduced Discounting
Slowing Growth?

Post March this year,
most etailers have reduced promotional campaigns after the Indian government
introdu ced new policy guidelines for online marketplaces. The fresh rules
prohibit online retailers from offering discounts directly . Cash burn for
Amazon, for instance, had risen up to almost $80-90 million per month in the
early part of the year -more than double of Flipkart's -but has since
stabilized, people privy to the matter said.Amazon's Agarwal, when asked about
it recently, did not give details on the mounting cash burn involved in weaning
away Indian consumers from rivals.

An investor who has been
tracking e-commerce says if the market has momentarily stopped growing, it's
because online players have reduced investments into market development. A slug
of risk capital came into India's online commerce industry , with Flipkart
leading the pack. Founded in 2007 as an online bookstore, the Bengaluru-based
poster boy of India's thriving startup ecosystem scooped up $3.2 billion, a
majority of the funding coming over the past two years, while Snapdeal
collected $1.3 billion. The Jeff Bezos-led Amazon, too, has been pumping
billions into India, the latest being a $3-billion investment announcement
-taking its overall commitment for the country to $5 billion in three years of
launching here.

Has Online Consumer Base
Capped Out?

India's online shopping
market, according to rough esti mates, is 60-70 million, and is expected to go
up to 100 million in the next few years. A notable spike happened in the past
three years, but the divide between tier I and tier II cities is still very
wide. The top 6-8 cities contribute 90% of sales for all the consumer internet
players, including app-based cab aggregators like Ola and Uber.

In an earlier
interaction with TOI, Binny Bansal, cofounder & CEO, Flipkart, said the
e-commerce major was keenly looking at ways to tap into its existing base of
users. “There are 50-60 million consumers buying online today . Given the large
base, it makes sense to ensure you are selling more to the same customers as
that opportunity is big enough compared to three years back,“ he had said.
Snapdeal's co-founder & CEO Kunal Bahl, too, has reiterated his focus on
the e-tailer's high-value consumers, suggesting GMV was not the metric his
company was chasing anymore. “Our GMV run rate continues to be healthy and
above $2.5 billion.We are significantly focused on delivering the best
experience, growing our net revenue which has increased three times in the last
12 months,“ a Snapdeal spokesperson said in an emailed response to TOI. GMV was
described by many as a vanity metric during the past few years when e-commerce
registered exponential growth.

“The moment of reckoning
is coming or may have come already for Indian ecommerce companies. The ease
with which these companies have been able to raise money from VCs may have made
them all sloppy , and the test then will be which ones can now work on the
`building-a-business' channel. As for whether the fault lies with Indian consumers
for not jumping fast enough onto the online wagon, it is a chicken-and-the-egg
problem that we have to deal with,“ says Aswath Damodaran, professor of finance
at the Stern School of Business at New York University.

What all of this will
mean for online retailers is that from here on, raising new capital at present
valuations will be a very tough proposition. Flipkart has been conserving cash
and has substantially brought down its burn rate to wade through this phase of
slow growth. Besides Amazon, there's Alibaba stitching up plans for a direct
entry into e-commerce, making it a contest between the two global powerhouses
and the Indian incumbents. The next one year will be extremely significant for
the local online retailers as they go back to the basics and try to make their
businesses self-sustaining while moving towards a tough path to profitability.

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